Just a decade ago, Saudi Arabia maintained unequivocal power over oil prices.

As the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), it has the power to turn the spigot off and on during oil crashes and rebounds, essentially dictating the price of oil in the global market.

But it seems the Saudis are tiring of this role. And now, the United States is ready to take control…

Heavy Is the Head That Wears the Crown

As the chart below shows, Saudi Arabia is still the dominant producer of oil within OPEC. It has the ability to produce more oil to temper prices or cut production to bolster prices.

Most recently, the Saudis used this power to flood the market and spark the oil crash, along with the other members of OPEC, in an effort to eliminate competition from the United States.

This ability to efficiently turn on or off production makes them the “swing producer.”

But the swing producer also tends to get the short end of the stick…

You see, if OPEC were to reduce output to keep prices high for everyone, they’d lose part of their market share to other, less-efficient producers who are not reducing production, but are still benefiting from the effect of higher prices.

The Saudis have been signaling for some time that they are fed up with the role…

Saudi Oil Minister Ali Al-Naimi expressed his country’s frustration with the situation in an exclusive interview with the Middle East Economic Survey earlier this year:

“Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce? That is crooked logic. If I reduce, what happens to my market share? The price will go up, and the Russians, the Brazilians, [and] U.S. shale oil producers will take my share,” said Al-Naimi.

Saudi Arabia saw the rise of shale oil from the United States and realized that it would, once again, have to lose market share in order to stay profitable.

Thus, OPEC’s refusal to cut production and keep prices high is a clear message that Saudi Arabia is done with being the swing producer.

The Saudis are hoping that prices will stay low long enough that marginal shale producers go out of business, and that those strong enough to survive will take on the role of swing producer and cut production.

And what country has been gaining ground in the oil market lately? The United States, of course…

While the shale revolution in the United States is in full swing, it’s still quite early in the game.

You see, U.S. oil production growth wasn’t expected to peak until the mid-2020s. And that might be pushed back a bit now, as the U.S. shale producers begin to temper exploration and production until prices recover.

However, it doesn’t change the fact that the United States has the ability to ramp up production, or as we are seeing today, delay or defer production (as a group) at the drop of a hat. And the number of producers is such that we can affect global supplies, and thus prices, almost as quickly as OPEC.

Yes, the United States is ready to assume the mantle of swing producers.

This realization is putting pressure on prices.

You see, many producers, like EOG Resources (EOG) and Encana (ECA), have announced lower capital spending going forward or the intention to keep production at the same level until prices recover – essentially keeping the spigot flow steady instead of turning it on full blast. But the world oil markets just aren’t buying it.

The reason is that there are now two entities that can turn on the oil spigot at a moment’s notice, and produce significant and measurable quantities of oil, should prices increase. Not to mention that without an increase in global demand, the price of oil isn’t going to stage a miracle recovery.

The Saudis and OPEC do have the ability to cut production (which many within the cartel are clamoring for) as does the United States.

But this time, the Saudis recognize that it’s in their best interest to wait this out and hope that enough shale production is cut back or that U.S. producers decide to permanently moderate production growth in return for higher prices. Barring a surge in global demand, this process could be protracted, and so could the slump in prices.

Comments (8)

And thus the GREED and CONTROL continues to push for higher prices for gas which puts a strangle hold on families across the nation. SHAME ON THE STOCK INDUSTRY AND GREEDY PORTFOLIO’S. There is a reason America is failing. GREED.

Darren-Greed is not why America is failing. America is failing because of the lack of greed. People are lazy or risk adverse. “Greed” is not a dirty word. It’s what makes America the envy of the world. It’s how our system works. It’s what makes you get up and go to work- if you do. I work everyday so I can buy the things I need and want. And those people are making and selling me those things for the same reason – “GREED”.

On the surface, this makes sense. Then, the thought occurs that SA manages it’s oil as a matter of NATIONAL policy. OUR policy appears to be just about anything to eliminate fossil usage. What you are describing is the natural effect of common business sense and not a joint effort such as OPEC is supposed to be.

US and Saudi Arabia are not truly comparable. Whereas in Saudi Arabia oil production is almost entirely controlled by the state , it is not so in the US where bulk of the production is in private hands. Hence it may not be as easy to turn off (or on) the spigot in US as it is in Saudi Arabia.

S.K.Limaye is correct. The two political systems are no longer compatible and the oil market is further corrupted by the political sanctions being imposed on Russia and Iran. The Saudis are only manipulating their oil price in order to maintain or increase market share as exports to the US decline. The Saudis are supportive of Iran sanctions.

I guess most Americans would prefer to see their oil kept at home so it may become necessary to introduce import tariffs in order to support domestic production.

OPEC sometimes cuts production to raise prices. Liberals in the US gov have been cutting production for decades by restricting drilling. Therefore these liberals (including some repubs) should be given a “friend of OPEC’ award – they’re better to OPEC than OPEC is to themselves.

you have to realize that this a game being played by the americans. They made a deal with the Saudis to bring down the price of oil to hurt Russia and Iran, and it worked VERY well.
Who cares if it ends up hurting a few jobs at home … as long as the war is won against the russians and iran … Saudis are only being shown as the fall guy(s) so no one can put the blame back home …… don’t fall for the front story, find out what is not being shared in NA.

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